Liabilitas jangka panjang Kieso Intermediate Accounting

2. C H A P T E R 14 NON-CURRENT LIABILITIES Intermediate Accounting IFRS Edition Kieso, Weygandt, and Warfield

8. Types and Ratings of Bonds LO 2 Identify various types of bond issues. Corporate bond listing. Company Name Interest rate paid as a % of par value Price as a % of par Interest rate based on price Creditworthiness

9. Pemeringkatan Obligasi

14. Valuation of Bonds Payable Bonds Sold At Market Interest 6% 8% 10% Premium Par Value Discount LO 3 Assume Stated Rate of 8%

15. Penilaian Obligasi Obligasi dijual Bunga Pasar 6% 8% 10% Premi Nilai Nominal Diskon Jika bunga nominal 8%

16. Bonds Issued at Par Ilustrasi: Santos Company mengeluarkan obligasi dengan nilai nominal $100,000 pada tanggal 1, 2011, jatuh tempo dalam waktu 5 tahun dengan bunga 9 persen tengah tahunan. Ketika obligasi ini dikeluarkan, tingkat bunga pasar obligasi ini adalah 9 persen. LO 3 Describe the accounting valuation for bonds at date of issuance. Illustration 14-1

17. Bonds Issued at Par Illustration 14-1 LO 3 Describe the accounting valuation for bonds at date of issuance. Illustration 14-2

18. Bonds Issued at Par Journal entry on date of issue, Jan. 1, 2011. Kas 100,000 Utang Obligasi 100,000 Journal entry to record accrued interest at Dec. 31, 2011. Biaya bunga obligasi 9,000 Utang bunga obligasi 9,000 Journal entry to record first payment on Jan. 1, 2012. Utang bunga obligasi 9,000 Kas 9,000 LO 3

19. Bonds Issued at a Discount Illustration: Disumsikan tingkat bunga pasar saat dikeluarkan obligasi tersebut adalah 11 persen . LO 3 Describe the accounting valuation for bonds at date of issuance. Illustration 14-3

20. Bonds Issued at a Discount Illustration 14-3 LO 3 Describe the accounting valuation for bonds at date of issuance. Illustration 14-4

21. Bonds Issued at a Discount Journal entry on date of issue, Jan. 1, 2011. Kas 92,608 Utang obligasi 92,608 Journal entry to record accrued interest at Dec. 31, 2011. Biaya bunga obligasi 10,187 Utang bunga obligasi 9,000 Utang obligasi 1,187 Journal entry to record first payment on Jan. 1, 2012. Utang bunga obligasi 9,000 Kas 9,000 LO 3

23. Effective-Interest Method Bond issued at a discount - amount paid at maturity is more than the issue amount. Bonds issued at a premium - company pays less at maturity relative to the issue price. Adjustment to the cost is recorded as bond interest expense over the life of the bonds through a process called amortization . Required procedure for amortization is the effective-interest method (also called present value amortization). LO 4 Apply the methods of bond discount and premium amortization.

24. Effective-Interest Method Effective-interest method produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds. LO 4 Apply the methods of bond discount and premium amortization. Illustration 14-5

25. Effective-Interest Method LO 4 Apply the methods of bond discount and premium amortization. Bonds Issued at a Discount Illustration 14-6 Illustration: Evermaster Corporation issued $100,000 of 8% term bonds on January 1, 2011, due on January 1, 2016, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 10% . Calculate the bond proceeds.

26. Effective-Interest Method LO 4 Illustration 14-7

27. Effective-Interest Method LO 4 Illustration 14-7 Journal entry on date of issue, Jan. 1, 2011 . Cash 92,278 Bonds payable 92,278

28. Effective-Interest Method LO 4 Illustration 14-7 Bond interest expense 4,614 Bonds payable 614 Cash 4,000 Journal entry to record first payment and amortization of the discount on July 1, 2011 .

29. Effective-Interest Method LO 4 Illustration 14-7 Journal entry to record accrued interest and amortization of the discount on Dec. 31, 2011 . Bond interest expense 4,645 Bond interest payable 4,000 Bonds payable 645

30. Effective-Interest Method Illustration: Evermaster Corporation issued $100,000 of 8% term bonds on January 1, 2011, due on January 1, 2016, with interest payable each July 1 and January 1. Investors require an effective-interest rate of 6% . Calculate the bond proceeds. LO 4 Apply the methods of bond discount and premium amortization. Bonds Issued at a Premium Illustration 14-8

31. Effective-Interest Method LO 4 Illustration 14-9

32. Effective-Interest Method LO 4 Illustration 14-9 Journal entry on date of issue, Jan. 1, 2011 . Cash 108,530 Bonds payable 108,530

33. Effective-Interest Method LO 4 Illustration 14-9 Bond interest expense 3,256 Bonds payable 744 Cash 4,000 Journal entry to record first payment and amortization of the premium on July 1, 2011 .

34. Effective-Interest Method What happens if Evermaster prepares financial statements at the end of February 2011? In this case, the company prorates the premium by the appropriate number of months to arrive at the proper interest expense, as follows. LO 4 Apply the methods of bond discount and premium amortization. Accrued Interest Illustration 14-10

35. Effective-Interest Method Evermaster records this accrual as follows. LO 4 Apply the methods of bond discount and premium amortization. Accrued Interest Illustration 14-10 Bond interest expense 1,085.33 Bonds payable 248.00 Bond interest payable 1,333.33

36. Effective-Interest Method Bond investors will pay the seller the interest accrued from the last interest payment date to the date of issue. On the next semiannual interest payment date, bond investors will receive the full six months’ interest payment. LO 4 Apply the methods of bond discount and premium amortization. Bonds Issued between Interest Dates

37. Effective-Interest Method Illustration: Assume Evermaster issued its five-year bonds, dated January 1, 2011, on May 1, 2011, at par ($100,000). Evermaster records the issuance of the bonds between interest dates as follows. LO 4 Apply the methods of bond discount and premium amortization. Cash 100,000 Bonds payable 100,000 Cash 2,667 Bond interest expense 2,667 ($100,000 x .08 x 4/12) = $2,667 Bonds Issued at Par

38. Effective-Interest Method On July 1, 2011 , two months after the date of purchase, Evermaster pays the investors six months’ interest, by making the following entry. LO 4 Bond interest expense 4,000 Cash 4,000 ($100,000 x .08 x 1/2) = $4,000 Bonds Issued at Par

39. Effective-Interest Method Bonds Issued at Discount or Premium LO 4 Apply the methods of bond discount and premium amortization. Illustration: Assume that the Evermaster 8% bonds were issued on May 1, 2011, to yield 6%. Thus, the bonds are issued at a premium price of $108,039. Evermaster records the issuance of the bonds between interest dates as follows. Cash 108,039 Bonds payable 108,039 Cash 2,667 Bond interest expense 2,667

40. Effective-Interest Method Bonds Issued at Discount or Premium LO 4 Apply the methods of bond discount and premium amortization. Evermaster then determines interest expense from the date of sale (May 1, 2011), not from the date of the bonds (January 1, 2011). Illustration 14-12

41. Effective-Interest Method Bonds Issued at Discount or Premium LO 4 Apply the methods of bond discount and premium amortization. The premium amortization of the bonds is also for only two months. Illustration 14-13

42. Effective-Interest Method Bonds Issued at Discount or Premium LO 4 Apply the methods of bond discount and premium amortization. Evermaster therefore makes the following entries on July 1, 2011, to record the interest payment and the premium amortization. Bond interest expense 4,000 Cash 4,000 Bonds payable 253 Bond interest expense 253

44. Extinguishment of Debt Illustration: Evermaster bonds issued at a discount on January 1, 2011. These bonds are due in five years. The bonds have a par value of $100,000, a coupon rate of 8% paid semiannually, and were sold to yield 10%. Illustration 14-21

45. Extinguishment of Debt Two years after the issue date on January 1, 2013, Evermaster calls the entire issue at 101 and cancels it. Illustration 14-22 Evermaster records the reacquisition and cancellation of the bonds Bonds payable 92,925 Loss on extinguishment of bonds 6,075 Cash 101,000 LO 6

50. Extinguishment of Non-Current Liabilities LO 6 Describe the accounting for extinguishment of non-current liabilities. IFRS requires the modification to be accounted for as an extinguishment of the old note and issuance of the new note, measured at fair value. Illustration 14-23

51. Extinguishment of Non-Current Liabilities LO 6 Describe the accounting for extinguishment of non-current liabilities. The gain on the modification is $3,298,664 , which is the difference between the prior carrying value ($10,500,000) and the fair value of the restructured note, as computed in Illustration 14-23 ($7,201,336). Resorts Development makes the following entry to record the modification. Note Payable (Old) 10,500,000 Gain on Extinguishment of Debt 3,298,664 Note Payable (New) 7,201,336

52. Extinguishment of Non-Current Liabilities LO 6 Describe the accounting for extinguishment of non-current liabilities. Amortization schedule for the new note. Illustration 14-24

53. Fair Value Option LO 7 Describe the accounting for the fair value option. Companies have the option to record fair value in their accounts for most financial assets and liabilities, including bonds and notes payable. The IASB believes that fair value measurement for financial instruments, including financial liabilities, provides more relevant and understandable information than amortized cost.

54. Fair Value Option LO 7 Describe the accounting for the fair value option. Non-current liabilities are recorded at fair value, with unrealized holding gains or losses reported as part of net income. Fair Value Measurement Illustrations: Edmonds Company has issued €500,000 of 6 percent bonds at face value on May 1, 2010. Edmonds chooses the fair value option for these bonds. At December 31, 2010, the value of the bonds is now €480,000 because interest rates in the market have increased to 8 percent. Bonds Payable 20,000 Unrealized Holding Gain or Loss—Income 20,000

56. Presentation and Analysis Note disclosures generally indicate the nature of the liabilities, maturity dates, interest rates, call provisions, conversion privileges, restrictions imposed by the creditors, and assets designated or pledged as security. Fair value of the debt should be discloses. Must disclose future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next five years. LO 9 Indicate how to present and analyze non-current liabilities. Presentation of Non-Current Liabilities

57. Presentation and Analysis Analysis of Non-Current Liabilities Two ratios that provide information about debt-paying ability and long-run solvency are: Total debt Total assets Debt to total assets = The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. 1. LO 9 Indicate how to present and analyze non-current liabilities.

58. Presentation and Analysis Analysis of Long-Term Debt Two ratios that provide information about debt-paying ability and long-run solvency are: Income before income taxes and interest expense Interest expense Times interest earned = Indicates the company’s ability to meet interest payments as they come due. 2. LO 9 Indicate how to present and analyze non-current liabilities.

59. Presentation and Analysis Illustration: Novartis has total liabilities of $27,862 million, total assets of $78,299 million, interest expense of $290 million, income taxes of $1,336 million, and net income of $8,233 million. We compute Novartis’s debt to total assets and times interest earned ratios as shown Illustration 14-28 LO 9 Indicate how to present and analyze non-current liabilities.